While many employers and employees may think that employment contracts are simple documents, there could be many legal issues or pitfalls of which should be aware of.  This article examines some recent developments regarding employment contracts such that both the employers and employees should pay more attention to in order to avoid legal disputes.

Definition of “Wages”

Although S. 2 of the Employment Ordinance (Cap. 57) (“EO”) seems to provide a rather comprehensive definition of “wages”, there has been considerable litigation seeking judicial clarification of the scope of “wages”. In Lam Pik Shan v Hong Kong Wing On Travel Service Limited (CACV 394/2007), the Court of Appeal had held that any “tips” received by tour escorts should form part of their wages and should be taken into account when calculating “annual leave pay” and “holiday pay”.

Similarly, in a recent landmark case called Cathay Pacific Airways Limited v Kwan Siu Wa Becky & Others v (FACV 5/2012), three cabin crew from Cathay Pacific Airways filed a case to Labour Tribunal concerning the calculation of their “wages”. The three claimants claimed that, according to the old ss.41(2) and 41C(2) of EO (prior to the Employment (Amendment) Ordinance 2007), Cathay Pacific should include the followings as part of “wages” in calculating their “holidays pay” and “annual leave pay”:-

(i) Line Duty Allowance;

(ii) Ground Duty Allowance;

(iii) Duty Free Sales Commission; and

(iv) Outport Allowance (i.e. a pre-estimate of the costs of meals and services at layover ports).

In this case, the Labour Tribunal firstly held that the three claimants should be entitled to include the above claimed commission and allowances (save for Outport Allowance) in calculating holidays pay and annual leave pay. However, the decision was later reversed when it was appealed by Cathay Pacific (and cross-appeals by the claimants) to the High Court in 2009. In contrast, the High Court judges held that such allowances received by flight attendants should not form part of their “wages” for the purpose of calculating the holiday pay and annual leave pay. The three claimants then further appealed the case to the Court of Appeal against the whole of the High Court’s decision. In 2011, the Court of Appeal reversed High Court’s decision by ruling that, save for the Outport Allowance, all the other claimed items should be included. As a result, Cathay Pacific appealed to the Court of Final Appeal against such inclusions.

Initially, the Court of Appeal refused Cathay Pacific’s application for leave to appeal to the Court of Final Appeal. Subsequently, Cathay Pacific lodged a direct application to the Court of Final Appeal and it was granted on the basis that the questions raised in the appeal “are worthy of the Court of Final Appeal’s attention”.

One of the questions being considered is whether annual leave entitlements that exceed the minimum amount required under the EO should be granted in accordance with the statutory rules.

Statutory Annual Leave vs. Contractual Annual Leave

In the appeal, Cathay Pacific Airways did not have objection on holiday pay under the EO, but it argued that even if those various allowances and commission should be included in calculating annual leave pay, they should only apply to “statutory annual leave” but not the “contractual annual leave” which was on top of the statutory minimum.

In deciding the case, the Court considered that there was nothing in the employment contract to suggest that “annual leave pay” might vary depending on whether it was part of the “statutory annual leave” or the “contractual annual leave”. Based on this, it was ruled that unless the employment contract stipulates to the contrary, the parties in the case had to be taken to have intended that the claimants should be paid at the same rate of as the statutory annual leave.

Discretionary Bonus

Besides allowance, “bonus” may be another controversial item in calculating “wages” because it may form a very substantial part of the annual salary for many employees in different industries. According to the statutory definition of “wages”, bonus shall form part of employees’ “wage” unless it is of a “gratuitous nature” or “payable at the discretion of the employer”.

Having said that, S. 11AA of EO does provide that:

“…an annual payment or annual bonus is not of a gratuitous nature and is not payable only at the discretion of the employer unless there is a written term or condition in the contract of employment to the contrary…”

In view of the above provision, it is therefore suggested that employers should specify in the employment contract that any bonus payable to the employees would be subject to the sole discretion of the employer. In the absence of these words, any bonus payment will be counted towards a part of employees’ wages.

In some circumstances, some employers may prefer to stipulate expressly a bonus calculation formula in the employment contract, though such bonus shall be subject to the discretion of the employer. Case law suggested that if a calculation formula is specified in the employment contract which is labelled to be subject to the employer’s discretion, the employer’s discretion might be considered to be limited to such calculation formula and the bonus payable shall not be wholly discretionary. In other words, such bonus payment will also be considered as part of the employee’s “wages”.

Conclusion

In conclusion, it appears that if there are no clear contractual terms to the contrary, the EO shall have implication on those contractual benefits on top of those statutory benefits. For those employers who do not prefer the EO to have any legal implications on the contractual benefits granted on top of the statutory benefits, they should set out such different treatments (between any contractual benefits and statutory benefits) clearly in the employment contract.